Continuing Cookie Chronicle 1 Continuing Cookie Chronicle (Note: This is a conti

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Continuing Cookie Chronicle 1 Continuing Cookie Chronicle (Note: This is a continuation of the Cookie Chronicle from Chapter 1.) CCC2 After investigating the different forms of business organization, Natalie Koebel decides to operate her business as a corporation, Cookie Creations Inc., and she begins the process of getting her business running While at a trade show, Natalie is introduced to Gerry Richards, operations manager of "Biscuits,"a national food retailer. After much discussion, Gerry asks Natalie to consider being Biscuits' major supplier of oatmeal chocolate chip cookies. He provides Natalie with the most recent copy of the financial statements of Biscuits. He expects that Natalie will need to supply Biscuits' Watertown warehouse with approximately 1,500 dozen cookies a week. Natalie is to send Biscuits a monthly invoice, and she will be paid approximately 30 days from the date the invoice is received in Biscuits' Chicago office Natalie is thrilled with the offer. However, she has recently read in the newspaper that Biscuits has a reputation for selling cookies and donuts with high amounts of sugar and fat, and as a result, consumer demand for the company's products has decreased Instructions Natalie has several questions. Answer the following questions for Natalie (a) What type of information does each financial statement provide? (b) What financial statements would Natalie need in order to evaluate whether Biscuits will have (c) What financial statements would Natalie need in order to evaluate whether Biscuits will be able to (d) What financial statement would Natalie need in order to evaluate Biscuits' profitability? Explain (e) Where can Natalie find out whether Biscuits has outstanding debt? How can Natalie determine enough cash to meet its current liabilities? Explain what to look for survive over a long period of time? Explain what to look for what to look for whether Biscuits would be able to meet its interest and debt payments on any debts it has? (f) How could Natalie determine whether Biscuits pays a dividend? (g) In deciding whether to go ahead with this opportunity, are there other areas of concern that Natalie should be aware of?

Explanation / Answer

a) Financial Statement of any company is mainly divided into 4 parts.

i) The Profit & Loss statement and its schedules provides information about the Turnover, details of various direct and indirect costs, interest payment, depreciatio of machinery, taxes paid and distribution of dividend to shareholders.

ii) The Cash Flow statement provides information about the cash generated or used from various activities by the business.

iii) The Balance Sheet of the Company will provide information about the asset and liability position as on balance sheet date

iv) Notes to Accounts provides information about the accounting policies and other relevant financial and non-financial information which include contingent liability etc,

b) The liquid ratio from the balance sheet should be derived to understand the ability of the company to pay its due. formula = (Cash equivalents + Marketable securities+Account Receivable) divided by Current Liabilities.

c)The profitability and reinvestment by the company from internal accrual is critical for long term sustainability, Hence whether the business is plouging back enough profit can be observed from the Profit & Loss Statement (Transfer to General Reserve).

d)The profitability of the company can be understood from the Profit & Loss Statement. The operating profit (Turnover less Operating Expenses) of the company is important metrics to look for

e)The outstanding debt can be found in the balance sheet under liability section. The Debt service coverage ratio (DSCR) is important ratio to understand the company's ability to pay its debts and meet the interest liability. The ratio can be derived as below:-

Debt Service Coverage Ratio = EBITDA (Profit & Loss Statement) Divided by Principal Payment + Interest Payment of Debts

f) The Profit & Loss statement will include the dividend payment by the company

g) The inventory(In Balance Sheet) change from last year is also important metrics to observe to understand whether the Company's product has become slow moving over the years. Also the DPO (Days Payable Outstanding) should be checked by using the formula :

Creditors X 365 divided by Purchase = DPO. This calculation will provide information about Company's practice in general to pay its creditors.

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